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Is AT&T/Time Warner a Bad Deal? Or Getting a Bad Deal?

You’re reading the Benton Foundation’s Weekly Round-up, a recap of the biggest (or most overlooked) telecommunications stories of the week. The round-up is delivered via e-mail each Friday.

Round-Up for the Week of November 4-10, 2017

News broke on November 8 that the Department of Justice is seeking to alter, if not block, AT&T’s proposed purchase of Time Warner. What until recently had seemed like a done deal is now up in the air. And different narratives are emerging. Did the DOJ request AT&T sell off Time Warner's CNN in order to approve the deal? Is the DOJ responding to President Donald Trump’s many complaints about CNN, essentially punishing a news organization for unfavorable coverage? Or is the DOJ seeking to enforce populist antitrust policy, something promised by Trump during the Presidential campaign? While preventing the deal is aligned with the public interest community, the unclear motivations are heightening concerns over what may be the government's actions catching up with Trump’s rhetoric.

What Happened to the 'Done Deal'?

In October of 2016, AT&T announced its plans to acquire Time Warner (owner of CNN, HBO, and Warner Bros.). The $85.4 billion acquisition would give AT&T ownership over popular content to distribute over its wireless and DirecTV pay-TV networks, creating a colossus straddling the worlds of internet access, news, and entertainment. AT&T argues the deal would help consumers by making film and TV more affordable. Public-interest advocates say this vertical merger would put too much media power in the hands of one company, exacerbate the lack of media diversity, and provide AT&T incentive to violate open-internet protections and prioritize its online content over the digital content of others.

Despite Trump's campaign rhetoric, until recently, the deal seemed destined to close by the end of 2017. But, last week, we read reports that the DOJ was not close to approving the deal, and, in fact, might sue to block the deal from happening. On Monday, AT&T CEO Randall Stephenson met with DOJ antitrust chief Makan Delrahim, who was just confirmed by the Senate in September. Delrahim, a former attorney and registered lobbyist, has expertise in media industry mergers. He was a registered Comcast lobbyist in 2009 and 2010, before Comcast's deal to buy NBCUniversal, and was registered as a lobbyist for AT&T in 2007.

At Monday's meeting with Stephenson, Delrahim outlined the DOJ's argument that the acquisition would cause anticompetitive harm. The two men discussed divestitures that might satisfy the government's concerns.

On Wednesday, sources on both sides disagreed about who brought up what. Some sources said Stephenson floated the possibility of selling CNN or other assets as part of a strategy to win governmental approval. Other sources said the DOJ demanded more -- not just the spin-off of CNN, but the sale of the entire Turner division, which includes CNN, TNT, TBS, and other channels. Further still, it was reported that the DOJ brought forth another option: selling DirecTV, the satellite broadcaster that AT&T bought two years ago for nearly $49 billion.

On Wednesday, Stephenson issued a clarifying statement, saying, “Throughout this process, I have never offered to sell CNN and have no intention of doing so." The following day, Stephenson reiterated his claim, saying, “irrespective of what you read yesterday, I have never been told that the price of getting the deal done was selling CNN. Period. And likewise, I have never offered to sell CNN,” adding that the news network is at the center of his company’s business strategy. "I don’t even know who in the DOJ is saying these things." Notably, Stephenson did not make the same promise to keep DirecTV. He punted on that question, citing a need for confidentiality in the negotiations. But AT&T and Time Warner executives reportedly say privately that such a concession is not realistic, given that DirecTV and its DirecTV Now streaming service would be crucial to a combined AT&T-Time Warner.

As it stands now, AT&T and Time Warner are poised to fight to keep all their assets intact, believing that the government has no legal grounds for blocking the transaction, according to company officials. Because the proposed deal involves two companies that do not compete directly with each other, executives at both AT&T and Time Warner believe there is little legal basis to block the acquisition.

Public Interest Concerns

The AT&T/Time Warner merger was already of concern for many. In June, eleven senators sent a letter to Attorney General Jeff Sessions to “closely scrutinize” the deal, as the lawmakers believed the merger would lead to “higher prices, fewer choices, and worse service for consumers.”

Free Press noted that the vertical merger would put too much media power in the hands of one company, exacerbate the lack of media diversity, and provide AT&T incentive to violate open-internet protections and prioritize its online content over the digital content of others.

Furthermore, some note that the DOJ's case against the deal is stronger than AT&T executives would have you think. Harold Feld, senior vice president at Public Knowledge, wrote, "[D]emanding divestiture of either the must have content or the DIRECTV distribution platform is precisely the remedy you would expect if you believe the deal presents significant harm because of the vertical integration issues." Feld noted that while it is generally true that vertical deals are hard to challenge, "the remedy here is similar to what the FTC imposed on the AT&T/Turner deal in 1996."

Allowing a combination of the largest pay-tv provider (DIRECTV), the second largest mobile distribution platform (AT&T Wireless), and a wealth of “must have programming” is precisely the harm that Congress identified and wanted to undo in the 1992 Cable Act. This is why it was so important to determine whether this was just about CNN, or was a much broader divestiture request...If this were just about CNN, it would make no sense from an antitrust perspective. But if its divestiture of either the “must have programming” (which would include CNN) or the largest [pay-TV] distribution platform (DIRECTV) — the two ingredients that when combined vertically has been proven to promote market power since 1992! — it follows naturally from the theory of harm. Get rid of one of the two ingredients for total market power dominance and you eliminate the threat to competition on the new platforms of streaming and mobile wireless.

Columbia Law Professor Tim Wu agreed that the DOJ is right in worrying about the AT&T/Time Warner deal, and argues that the problem is compounded by the extreme secrecy that has surrounded merger reviews:

The department seems right to worry about the idea of AT&T, the onetime telephone monopoly and the world’s largest telecom company...taking over one of America’s most important media operations. The proposed deal should, if anything, be the focus of far more public debate. If the Justice Department is, in fact, doing its job appropriately and not behaving as Mr. Trump’s henchman, it should be willing to show us how. It ought to explain its concerns about the merger to the public and to Congress.

While this week's developments are aligned with the public interest community, the motivations are critically important. The deal should be reviewed on antitrust, media ownership concentration, and vertical integration grounds, not reviewed in a way to punish news organizations or chill free speech. As Wu noted, the prospect of a president using antitrust law to punish political opponents is deeply disturbing. But should we conclude that the Justice Department is doing something wrong? Maybe not.

Making Good on Campaign Promises?

One explanation for the DOJ’s behavior is that it is simply delivering promised “populist” governance and enforcing antitrust.

President Trump has spoken out against the AT&T-Time Warner deal before, most notably during a speech in the final month of the 2016 presidential campaign in Gettysburg, Pennsylvania. After mentioning the “crooked” media, he seemed to oppose AT&T’s bid for Time Warner. “As an example of the power structure I’m fighting,” candidate Trump said, “AT&T is buying Time Warner and thus CNN, a deal we will not approve in my administration, because it’s too much concentration of power in the hands of too few.” He described U.S. media corporations as “trying desperately to suppress my vote and the voice of the American people.”

In the same speech, Trump also said he would look at breaking up Comcast-NBCUniversal. He said the merged company is “trying to poison the mind of the American voter,” and that, “deals like this destroy democracy.”

Therefore, the DOJ may be working in-line with Trump’s campaign promises to thwart expanding power structures through antitrust measures.

Or Authoritarian Crackdown?

Why is the DOJ taking a hardline approach with AT&T? Is the DOJ’s recent behavior the result of pressure from President Trump, who has been critical of the department and CNN?

President Trump has regularly called CNN “fake news,” filled with “really dishonest people.” He has posted on Twitter a doctored video of him beating up a supposed CNN journalist. And he has floated the idea that CNN President Jeff Zucker would be forced out -- right around the same time that Administration officials were suggesting the possibility that they would use the merger to bring CNN to heel. According to Jim Rutenberg in The New York Times, should President Trump’s CNN enmity emerge as the chief motivation for the Justice Department’s new moves against the proposed merger, President Trump “will become the first president since Richard Nixon to use the levers of executive power to threaten the economic interests of a news organization whose coverage he does not like.”

In response to news about pressure from President Trump, White House Deputy Press Secretary Raj Shah said, “The President did not speak with the Attorney General about this matter, and no White House official was authorized to speak with the Department of Justice on this matter.”

Delrahim also denied that President Trump had been involved in the discussions. “I have never been instructed by the White House on this or any other transaction under review by the antitrust division,” he said.

But several lawmakers voiced concern over any type of pressure from the Trump White House interfering with the DOJ's review. "Any indication that this administration is using its power to weaken media organizations it doesn’t like would be a profoundly disturbing development," said Senator Al Franken (D-MN).

“The Department of Justice’s review process should be entirely void of politics,” Senator Ed Markey (D-MA) said. “Any suggestion that the deal be conditioned on selling off a news channel because of its coverage is offensive to both the First Amendment and the rule of law."

And we also heard some concern from the Federal Communications Commission (which, if you're scoring at home is not reviewing the deal because it does not involve any spectrum licenses).

Wait, are we really going to make the @TheJusticeDept use antitrust law to force the sale of a cable channel because the President doesn't like its news coverage? You can dislike consolidation but still find this extremely disturbing if true.

Is AT&T Pushing the ‘Authoritarian Crackdown’ Narrative?

Derek Thompson, writing for The Atlantic, noted another possibility: that AT&T recognized it could co-opt the news media’s disgust with the President to distribute a pro-merger narrative that would drown out the Justice Department’s reasonable objections to the deal. “[T]here are reasons that AT&T would benefit from getting out the narrative to news organizations that the Justice Department might be mistreating it,” he wrote.

Andrew Jay Schwartzman, Benton Senior Counselor at the Public Interest Communications Law Project at Georgetown University Law Center's Institute for Public Representation (IPR), said, “If I’m AT&T, I’m calling everybody and saying they want us to sell CNN. That story helps AT&T.”

The Impact of Trump’s Rhetoric

President Trump’s outbursts about CNN and the media at-large have added heightened scrutiny to the DOJ’s moves. Rutenberg writes, “the tussle over the merger details brings a new level of seriousness to Mr. Trump’s virulent, anti-press speech, raising fresh concerns that it could result in real-world, governmental action. The appearance alone could be enough to send a powerful message — cross the executive branch at your own peril.”

“This is the cost of disparaging institutions,” said Harry First, a top antitrust professor at New York University School of Law. “Normally, you would say, look here’s the Antitrust Division, they’re going to do their job, they should enforce merger policy.” Given President Trump’s comments, “no matter what they do, [he] has cast doubt on their good faith.”

"The unfortunate fact is that Mr. Trump has engendered so much distrust in government that everything that any federal agency does these days seems questionable," said Wu.

Future of the Deal

If the Justice Department were to sue to block the deal, that would not be the end of the matter unless the companies abandoned their plans. The DOJ would have to present its case to a federal judge and prove that the deal would likely harm competition. Fighting the deal could prove challenging for regulators, according to antitrust experts. The Justice Department would have to argue that AT&T would have an incentive to withhold Turner channels from rival broadband distributors like Verizon and Comcast. It could also try to demonstrate that AT&T would give channels like CNN or TNT preferential treatment over their competitors.

"We are prepared to litigate now,” said AT&T's Stephenson on Thursday. If it did end up in court, Stephenson said he was confident in the company’s legal position and that the litigation could be concluded by April 22, a deadline the merger partners put on the transaction.

Conclusion

Attorney General Sessions will be testifying before the House Judiciary Committee at an oversight hearing on Nov 14. While much of the questioning will pertain to Sessions’ relationship to the Trump campaign and possible connections to Russia, lawmakers will have a chance to ask Sessions about the AT&T/Time Warner deal.

A final word from Free Press’ Craig Aaron:

While there are plenty of good reasons to oppose AT&T’s Time Warner takeover, punishing CNN for trying to hold this administration accountable isn’t one of them. No matter where you come down on this merger, everyone should agree that the government shouldn’t base antitrust decisions or FCC rulings on whether it likes a newsroom’s coverage. If today’s news is just cover for an attack on CNN, it’s only the latest example of how Trump is all too willing to abuse his power to intimidate the press. He’s also threatened to yank NBC licenses as punishment for critical coverage even as his FCC bends over backwards to remove all obstacles to right-wing broadcaster Sinclair’s takeover of Tribune Media. It’s certainly a violation of the spirit, if not the letter, of the First Amendment. This is how leaders behave in dictatorships, not democracies.

There is sure to be more news in the days and weeks ahead. In the meantime, you can be sure to follow along through Benton's Headlines.